XML 61 R12.htm IDEA: XBRL DOCUMENT v2.4.0.8
Note 6 - Convertible Notes to Related Parties
12 Months Ended
Dec. 31, 2013
Debt Disclosure [Abstract]  
Debt Disclosure [Text Block]

NOTE 6 CONVERTIBLE NOTES PAYABLE TO RELATED PARTIES


In April 2011, we entered into a Securities Purchase Agreement (Purchase Agreement) with certain institutional investors (Purchasers), including a fund affiliated with Kevin C. Tang, who is the Chairman of our Board of Directors, for a private placement of up to $4.5 million in Senior Secured Convertible Notes due 2021 (Notes). The Purchase Agreement provided for the Purchasers to purchase $1.5 million aggregate principal amount of Notes at the initial closing. Pursuant to the Purchase Agreement, the Purchasers had the option to purchase an additional $3.0 million aggregate principal amount of Notes at any time until May 2, 2013 (Purchase Option). The Notes are convertible into shares of the Company’s common stock at a rate of 1,250 shares for every $1,000 of principal and accrued interest due under the Notes (Conversion Shares).


The cash received from the initial closing of the Note financing, which resulted in the issuance of $1.5 million aggregate principal amount of Notes, was approximately $1.3 million, net of issuance costs. In May 2012, the Purchasers exercised their Purchase Option in full, and we received $3.0 million of cash through the issuance of the remaining $3.0 million aggregate principal amount of Notes. As a result of the exercise of the Purchase Option, the Purchasers have purchased the full amount of Notes that the Company was obligated to sell under the Purchase Agreement.


The Notes are secured by substantially all of the assets of the Company, including placing our bank accounts under a control agreement. The Notes initially bore interest at 20% per annum, payable quarterly in cash or in additional principal amount of Notes at the election of the Purchasers. In June 2011, the Notes were amended to reduce the interest rate to 6% per annum effective July 1, 2011. The Notes mature on May 2, 2021; however, the holders of the Notes may require prepayment of the Notes at any time, at each holder’s option.


There is no right to convert the Notes to the extent that, after giving effect to such conversion, the holder would beneficially own in excess of 9.99% of the Company’s outstanding common stock. Each holder of the Notes can increase or decrease this beneficial ownership conversion limit by written notice to the Company, which will not be effective until 61 days after delivery of the notice.


As of December 31, 2013, the Company was in compliance with all debt-related covenants under the Notes. Upon the occurrence of an event of default under the Notes, the holders of the Notes have the right to require the Company to redeem all or a portion of their Notes.


Pursuant to the Purchase Agreement, the Company filed a registration statement on Form S-1, registering for resale 3.5 million shares (as adjusted for the reverse stock split) underlying the Notes. The registration statement was declared effective on July 29, 2011. The Purchasers have agreed to waive their right to require the Company to maintain the effectiveness of the registration statement and to register the additional shares underlying the Notes until they provide notice otherwise.


The Notes contain an embedded conversion feature that was in-the-money on both issuance dates. Based on an effective fixed conversion rate of 1,250 shares for every $1,000 of principal and accrued interest due under the Notes, the total conversion benefit at issuance exceeded the loan proceeds. Therefore, a full debt discount was recorded in an amount equal to the face value of the Notes on the issuance dates and the Company began amortizing the resultant debt discount over the respective 10-year term of the Notes. During the year ended December 31, 2013, accrued interest of approximately $291,000 was paid-in-kind and rolled into the Note principal balance, which resulted in an additional debt discount of approximately $291,000. For the years ended December 31, 2013, 2012 and 2011, interest expense relating to the stated rate was approximately $295,000, $216,000 and $97,000, respectively, and interest expense relating to the amortization of the debt discount was approximately $533,000, $389,000 and $103,000, respectively.


As of December 31, 2013, the carrying value of the Notes was approximately $1,025,000, which is comprised of the $5,033,000 principal amount of the Notes outstanding, less debt discount of $4,008,000. If the $5.0 million principal amount of Notes is converted, the Company would issue 6.0 million shares of its common stock. Accrued interest on the principal balance was approximately $75,000 at December 31, 2013.